Trade tensions

December 11, 2003|By Elizabeth Economy and Adam Segal

THE WORD from Washington is that U.S.-China trade relations are back on course.

Chinese Premier Wen Jiabao told a grateful President Bush that China would take steps to redress the growing trade deficit, now threatening to top $120 billion. But the question remains as to whether the two leaders have made real progress or merely papered over their differences.

Trade disputes between the United States and China over textiles, televisions and iron fittings are quickly becoming a major irritant in the relationship. Given their growing shared economic and political interests, a full-blown trade war between the two countries is unlikely. The increasing interdependence of the Chinese and U.S. economies makes tit-for-tat retaliation dangerous.

In fact, Mr. Wen told New York bankers Tuesday that "we should not and will not fight a trade war."

But domestic politics on both sides of the Pacific could quickly overwhelm the restraint leaders in Washington and Beijing have been showing until now, taking the trade conflict in directions neither side expected or wanted.

U.S.-China trade has become a high-stakes game in Washington. Faced with a burgeoning trade deficit with China and an economy whose recovery has not yet embraced the Midwestern manufacturing base or the textile mills of the Carolinas, Congress has threatened six trade-related bills, the harshest of which would impose tariffs of up to 27.5 percent on Chinese imports. Several of the Democratic challengers to President Bush have also jumped on the bandwagon, recognizing an opportunity to pick up votes in crucial states.

To their credit, Mr. Bush and top members of his economic team, including Federal Reserve Chairman Alan Greenspan and U.S. Trade Representative Robert B. Zoellick, have done their best to argue that long-term U.S. economic interests are not well served by such blatant trade protectionism.

The president has tried to address congressional concerns and at the same time avoid a trade war with China by responding in a highly measured fashion: Recent quotas on Chinese textile imports, for example, actually affect only 5 percent of China's total textile imports to the United States. Most recently, Mr. Bush announced his decision to withdraw steel tariffs.

Still, the administration's actions have sent a signal to U.S. manufacturers and agricultural producers that the election year is in full swing, and the special interest queue is likely to get longer every day.

Beijing's response has been muted, confined largely to conciliatory words and exhortations to Washington not "to politicize trade." China's leaders recognize that textile and television quotas may be merely an opening salvo to bring pressure on them to purchase more U.S. goods and to make headway in reducing trade barriers.

A recent trip by Chinese officials to the United States to purchase soybean, cotton, fertilizer and telecommunications products was canceled, but the Ministry of Commerce explained that this was not in retaliation for textile quotas but rather due to "visa problems." In a diplomatic move previously unthinkable for a Chinese leader (and worthy of any U.S. presidential candidate), Mr. Wen met with American workers whose jobs were said to be threatened by Chinese exports.

Washington should realize that trade pressure on China is not without potential costs. Beijing has its own battles to wage on the domestic front. President Hu Jintao and Mr. Wen are new leaders with little international experience, and they are still consolidating their power against significant domestic opposition.

At some point, either to demonstrate nationalist credentials to domestic constituencies or to show Washington that there are costs to taking China for granted, these leaders may decide to react to U.S. pressure with less-conciliatory measures.

In critical respects, the interests of U.S. and Chinese leaders are closely aligned. After all, both Mr. Bush and Mr. Wen have articulated their commitment to global free trade and believe it is essential to the continued growth of their respective economies. Also, the tenuous strategic environment, including North Korea, Iraq, the war on terror and rising tensions across the Taiwan Strait, means that neither side is inclined to create additional distractions for itself or the relationship.

Legitimate gripes concerning China's trade practices remain and need to be addressed. But the proper arena in which to do this is the World Trade Organization. The United States and China negotiated the terms of China's entry into the WTO for more than 15 years. We wrote the rules together, and both sides should live by them.

Otherwise, as the world's largest and sixth-largest economies, we risk far more than several months of trade disputes and increasing invective. We risk undermining the very basis of the global free trade regime.

Elizabeth Economy is director of Asia studies at the Council on Foreign Relations. Adam Segal is a senior fellow for China studies at the council.